Smart Design’s Gordon Hui outlines three essential questions to ask before you connect your “dumb” product to the cloud.

Thanks to widespread Internet adoption and over 10 billion connected devices around the world, companies today are more excited than ever about the Internet of Things. Add in the hype about Google Glass and the Nest Thermostat, and nearly every business, including those from traditionally low-tech industries, wants to get on the cloud, track a group of devices, and gather data. The question, however, is not if a device can be connected, but why the company is connecting a previously “dumb” product to the cloud. Or stated differently, if a company invests in making my toaster talk to my lawnmower, is that really a good business decision and why?

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Companies that are successfully adapting and innovating Internet of Things platforms are focused on identifying meaningful opportunities, not just technologies. These opportunities bridge a practical understanding of what embedded computing could potentially do with a clear hypothesis about what will change the game for a large consumer segment or cross-section of industries.

To create successful, connected device-based businesses, senior leaders should be prepared to answer three questions that I call the Internet of Why:

1. Why does connecting to the cloud create greater value for the user?

Although the cost of sensors and RFID tags continue to decrease, connecting a previously “dumb” device to the cloud often requires investments in new capabilities and features that must be maintained over time, resulting in a more premium product. The higher price point can be justified only if adding connectivity truly addresses previously unmet customer needs or opportunities.

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For Philips Hue, an Internet-enabled lightbulb set, understanding why consumers would want connected lighting was the first major step to building a great platform. In the early phases of the project, the Hue product team identified hundreds of use case scenarios, which were repeatedly explored and tested until four consumer value propositions–ambience creation, security, biological benefits, and gentle reminders–were identified. These value propositions, not the technology itself, established the direction for product development efforts.

2. Why are the connected features on your product roadmap integral to the core experience?

When connecting a product to the Web, it can be tempting to build the most ideal user experience that fulfills both the grandest ambitions of discriminating customers and the perfectionist inclinations of the product team. However, creating the ideal takes time and money, and assumptions about perfection will change based on customer feedback. Taking a Lean Startup approach, with an emphasis on just the features that need to be deployed, encourages a more focused first-generation product and faster speed to market.

The team behind the famous Pebble watch, which debuted as a Kickstarter campaign, allowed for prototyping and a limited run of the first-generation device. After demonstrating the value of the core experience, the Pebble team added meaningful features, like waterproofing and an updated SDK, based on actual feedback from users about what they would pay for.

3. Why does connecting to the cloud enhance your business model?

Connecting products offers the potential to fundamentally shift the revenue and cost dynamics of any business, but embedding connectivity also introduces greater monetization complexity. Whereas an unconnected product might have one revenue stream, a Web-enabled product can leverage multiple revenue streams spanning a variety of B2B and B2C customers. The potential for new services–both free and paid–and unique possibilities associated with new data streams makes alignment on a business model even more difficult.

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Progressive Insurance’s Snapshot program is an example of how dramatically the Internet of Things can transform a traditional business model. In exchange for inserting a telematics device into the car’s diagnostic port, Progressive will provide a discounted policy rate based on how an insured motorist actually drives, including how hard he or she brakes and the time of day the car is used. By offering this type of usage-based insurance, Progressive is better able to match insurance premiums to the actual risk profile of individual policyholders, resulting in significantly higher per-policy profitability and improved pricing for safe drivers.

In the age of connected devices, access to technology is no longer a barrier to entry; open-source hardware tools such as Arduino and Raspberry Pi can be purchased for under $35, while software and Web services from Amazon are available for pennies per terabyte. Instead, the challenge is to bridge the technology to a larger context and understand why connecting to the cloud creates greater value for the user, product experience, and business model. Companies that are actively addressing this contextual challenge, as opposed to focusing on technology and hype, are having the most success and enabling true differentiation in the connected-products space.